In this video Mark Kohler explains the U.S. tax obligations that arise when you employ a household worker—such as a nanny, gardener, maid, or butler—who earns more than $2,000 a year. He walks through how to determine whether the worker is a household employee, an exempt family member, or an independent contractor, and outlines the three key classifications. Kohler then details the required paperwork (W‑4 for employees, W‑9 for contractors, and I‑9 for employment eligibility) and breaks down the payroll taxes you must pay: the 15.3% FICA (Social Security and Medicare) which can be withheld and matched, the 6% FUTA tax on the first $7,000 of wages, and possible state unemployment (SUTA) and workers‑comp insurance obligations. He explains that these taxes are reported on Schedule H of the federal return. Kohler also mentions the limited child‑care tax credit (up to $2,100, phased out at $43,000 AGI) that applies only to qualifying child‑care expenses, not to other household services. Finally, he warns of audit and enforcement risks—unemployment claims, grant applications, earned‑income credit issues, and the need to provide a W‑2—encouraging viewers to consult a tax professional and use the resources linked in the description.
Chapters
Hi, Mark Kohler here with another tax and legal tip. Let's talk about the household employee and nanny tax. Now, they're one in the same. And if you have someone working in your home for more than $2,000 a year, which is an average of $166 a month, this tax may apply to you. And the IRS is up in their game. So let's talk about it. Number one, let's find out if this person even is classified as a household employee. Now, a nanny by default is a household employee. This could be your gardener, your maid, your butler, anybody that's coming to your house and again, working under your direction for more than $2,000 a year or $166 a month. Now, there's three classifications we need to worry about here to see if they fall under this tax. The first one that's exempt, let's give you the good news. First, if this person is a spouse that you're paying to help take care of your family members or your house, then obviously you don't have to withhold the tax. If they're a child of yours under age 21, they're a parent of yours helping out and you're paying them, or if they are a third party under age 18. So if you're hiring that little teenage girl to come by the house or the teenage boy to work on your garden and they're under age 18, in any of those four instances, this tax does not apply. Second type is the independent contractor, which also allows you a get out of jail free card. So if this person qualifies as an independent business owner, you don't have to withhold this tax or be subject to the quote unquote nanny or household employee tax. Now an independent contractor is going to be someone that has multiple customers or clients. They're going to come to your house with typically their own equipment. And you may would generally be paying a service. You know, you're paying a landscape company or you're paying a nanny service or a maid company. And you could have a different person show up at your house each week, but they're obviously a third party contractor that services multiple people. That's you're out of the woods, that is not a household employee. But anything else is going to fall into that. Third classification of a household employee. Someone that's under your direction, they come to your house, they do what you say and you kind of control their time and, and they don't work for anyone else. Now we got issues. Second issue, let's talk paperwork. If you are going to have someone working in your home that's a household employer or contractor. There's two major forms you want to be aware of. That's the W4 or the W9. A W4 is what you're going to get from someone that's going to be acting as an employee of yours and you're going to be paying this nanny tax. So pay attention to the rest of the video. A W9 is someone that is acting like a contractor. And you want to get that W9 so. So that you know that they're independent. And what's their tax ID number? You're going to want to use this for potentially the child care tax credit, which comes later. But you want to get a W4 if they're probably an employee or a W9 if they look like a contractor. Now, there's another third important form. That's the i9 that makes sure they're not an illegal immigrant. And you want to make sure that they are honest and legal to live and work in the US that's the i9. Make sure you get it so you don't get into the immigration problems. Third issue. Let's talk about how much this tax is so you don't get too nervous about it. But it's not cheap either. There's really three pieces. The first one is the FICA, the employment taxes. It's 15.3%, which you may pay entirely on behalf of your household employee. Or you might do some withholding and then match it. So it's 7.65 of withholding and then you match 7.65 and you get to 15.3%. Now, most people, if they're going to pay a nanny or a household worker, a landscaper, you pay them $1,000 cash. Then at the end of the year, you have to report this 15.3% tax on schedule H. That's where you're going to pay it at the end of the year on your tax return. You just keep track how much you're paying them. And at the end of the year, you fill out this Schedule H form. But hold on, it does not end there. There's a FUTA tax, which is 6% on the first 7,000 of wages. Now, that's also reported on Schedule H. That could be around $400 if you're paying them $7,000 or more throughout the year. And then third, you've got to worry about the state exposure. Do you need to withhold suta, state unemployment tax or even carry workers comp? So if they get hurt on your property, you've got insurance coverage. I know there's a lot here. So you want to consult with your tax professional and say, hey, I'm going to have this person working in my house. I'm paying them 2 to 4 or $500 a month or more. Definitely over the $2,000 limit. What taxes should I worry about? So I know this is a short video, but I just want to expose you to these taxes and what it could be. You got to prepare for it. Fourth issue. Can you get any benefit on your tax return with this? Well, a little. It's called the child care tax credit. So if you pay someone to take care of your children and your children are under age 13, and there's a bunch of other rules, you want to look at Publication 503, you might qualify. The big kicker there here, though, is the credit, which could be a maximum of $2,100, phases out once you make $43,000 or more. So most of you that can afford child care or have a nanny or have a landscaper, you're going to be making too much money to get any sort of credit. By the way, the landscaper does not qualify for a child care tax credit. So you're not going to get any tax deduction for any of this landscaping or butler services. It's just the childcare. Again, if you make too much, you phase out. Sorry. Finally, this is a very, very important issue, and you've got to deal with it. This isn't just because you might run for office someday and you're gonna get grilled on your tax returns on those household employees. This could end up in an audit for you. There's stories all the time of these people you're paying to be your nanny or your landscaper or whatever. And then they go on to file for unemployment after you fire them. Or they go to college and apply for a grant or school aid and put you down as their employer, or they get hurt, or they want to file their tax return and get an earned income credit, and they ask you, where's their W2. All of this could alert a state or federal agency to what you were doing. And then you get a nasty letter in the mail. Be careful. Just deal with it. Now. The best form to be aware of is the Schedule H form on your federal return at the end of the year. Talk to your tax professional. Find out what your federal or state exposure is. Sorry, but to live in this amazing country, we got to pay a few taxes. Good luck and see you on the backside. Thanks so much for watching and if you found that helpful, please look in the description below. I've got links to my tax and legal library, my QuickBooks training videos, how to start a small business 50, 60, 70 videos, some as long as 30 minutes, explaining more information on tax and legal strategies that will change your life. Also, if you'd like to subscribe to my newsletter or check out my social media links, please click here. There are weekly free tips and strategies and articles that you'll find extremely helpful, and I would appreciate it if you'd subscribe to my channel. I've got so many videos here I produce every week on my YouTube channel and I'd love to give you a ping every time I shoot a new video. Thanks so much and keep living the American dream.
